Aid and Fiscal Behaviour in Developing Asia

Many lofty expectations surrounded the role and impact of development aid in the early days of its provision. According to the protagonists of aid many developing countries could not grow at sufficiently rapid, eventually self-sustaining, rates required to modernise their economies. Of course, there were many early critics, who saw aid as a way of keeping poor countries poor and dependent upon their much richer, western counterparts. This group was as adamant of the negative effects of aid as the proponents of its positive effects. Applied research on the macroeconomic impact of aid has contributed little to this debate, to the extent that the relevant literature fails to settle the issue either way. The present study argues that the exiting literature’s theoretical underpinnings are at best vague and at worst non-existent, data sets are too aggregate and statistical methods too primitive. Yet even more serious is that the literature (with one important exception of Heller 1975) has all too often ignored the precise process or channels through which aid affects such macroeconomic variables such as income and growth.